KOCHI: State Bank of India (SBI) has reportedly mobilised more than $1.5 billion under the Reserve Bank of India's (RBI) special FCNR(B) deposit window. Several other banks, too, are aggressively chasing foreign currency deposits after the RBI decided to absorb the entire hedging cost on fresh FCNR(B) deposits.
But beyond the headline mobilisation figures lies a more fundamental question: is the scheme attracting genuinely fresh foreign currency into India, or is it largely reshuffling existing money within the banking system?
The distinction is significant because the RBI introduced the special concession primarily to augment India's foreign currency resources at a time when the central bank has been actively intervening in the foreign exchange market to support the rupee.
However, bankers say a substantial part of the current mobilisation may not necessarily represent incremental inflows.
Intense competition
One reason is the intense competition among banks for deposits that are already within the Indian banking system.
Since renewed FCNR(B) deposits are not eligible for the RBI's hedging support, banks have a greater incentive to attract deposits maturing with rival lenders rather than simply retain their own customers.
While one bank may report a sizeable mobilisation, another may have lost an equivalent amount, resulting in little change in the banking system's aggregate FCNR(B) deposits.
"The focus should not be on how much each bank raises. The real question is how much fresh foreign currency actually comes into the country," said the treasury head of a mid-sized Kerala-based private sector bank.
"A part of the mobilisation is certainly existing FCNR(B) deposits moving from one bank to another. At the system level, that doesn't necessarily add new dollars."
Another issue attracting attention is the growing use of leveraged structures.
Several banks are offering products under which eligible non-resident customers can borrow foreign currency through overseas branches and use the proceeds to create larger FCNR(B) deposits, with the deposits themselves serving as collateral.
Banks have also sought regulatory clarity on certain aspects of such structures where the lending branch and the deposit-taking entity belong to the same banking group.
Does leverage really help?
While such arrangements remain within the regulatory framework, they also raise a broader policy question. If a significant portion of the deposits is created through leverage rather than fresh overseas savings, the headline mobilisation figures may overstate the actual addition to India's foreign currency resources.
The economics of these leveraged products have also become more challenging.
According to bankers, overseas borrowing costs have risen in recent weeks, narrowing the spread available to banks and making it more difficult to offer the highly leveraged returns that initially attracted wealthy non-resident investors.
The increase in funding costs has prompted several lenders to recalibrate their mobilisation strategies, with expectations that the pace of FCNR(B) collections could moderate after the initial surge.
Net addition to forex?
None of this diminishes the success individual banks may have achieved in attracting deposits.
The broader policy issue, however, is whether the RBI's objective should be measured by the amount mobilised by individual banks or by the net addition to India's foreign currency resources.
If a meaningful share of the inflows ultimately represents deposits migrating between banks or funds mobilised through leveraged structures, the banking system's aggregate foreign currency resources may increase by considerably less than the headline figures suggest.
As banks continue to announce sizeable FCNR(B) mobilisation numbers, the coming months may reveal whether the RBI's special window has genuinely attracted fresh dollars into the country—or whether it has primarily reshaped market share within the banking system.
